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Ratio Catagories

In: Business and Management

Submitted By patrickl306
Words 269
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Ratio Catagories
1) According to (Parino, Kidwell, & Bates, 2012), the ratio categories are, a. liquidity, b. efficiency, c. leverage, d. profitability, e. Market value indicators,
Part 2 of the question: 2. Liquidity is ‘Current Ratio’. The value is when Current Assets divided by Current Liabilities. The result, how many times the business can pay off short-term liabilities using all the cash and liquidate assets. Higher the ratio, more capable the business can pay off short-term debts. 3. Efficiency ratio is ‘Inventory Turnover’. It is taking the ‘cog’ sold divided by inventory. The result determines how many times a ‘turn over’ or replacing inventory over a years’ period. For example if the turnover ratio is two, 2 times the amount of standard inventory was sold. 4. Leverage Ratio is ‘total debt ratio’. Total debt ratio is taking total debt divided by total assets. The result tells the percentage ‘assets financed with debt’ according to (Parino, Kidwell, & Bates, 2012). Higher the ratio, the company uses more financing to fund operations.
Part 3 of the question:
Calculated ratios are not much without the ‘corresponding industry average ratio’ because analysts and investors need a comparison how a company competes with industry averages. Example, an investor is deciding to lend to a business, the investor would compare the borrowing companies' current ratio with the ‘industry average ratio’ to establish risk of repayment. If the ratio is less than average, the investor may not lend money, or may lend but at a higher interest rate. Obviously, lower interest rates are given to companies with higher ratios than the industry...

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